Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Making Sense of Mortgage Rates and Regulations

Posted by Larry Doyle on September 18, 2012 6:26 AM |

The Federal Reserve has already purchased billions in mortgage-backed securities via prior iterations of quantitative easing. The “QE-infinity” announced just last week is targeted at purchasing hundreds of billions more in MBS.

There is certainly a lot going on within the world of mortgages. Not all of it is necessarily good. I remain steadfast in my defense of fair and transparent markets. That said, it should be no surprise that more regulations do not necessarily mean better regulation.

While the Fed’s QE operates from the proverbial 60,000 feet, let’s get a first hand look at what is really going on within the world of residential mortgages. To do just that I welcome highlighting the writing of a regular reader. The $avvy Borrower is the work of a pro’s pro at Independence Mortgage Company in Newport Beach, CA. 

Mortgage Costs Rise Again
Ronald Reagan once said, “The most dangerous words were, I’m from the gub’ment and I’m here to hep you.” In the past few years the Congress has passed more laws attempting to regulate a style of mortgage originator that does not exist anymore. The lawmakers still think that the sub-prime industry is alive and well and needs to be put out of business.

Sorry. That business is gone. The companies are gone, the people are gone, and if someone tried to do a sub-prime loan today, there would be no one to sell it to. It’s as if in 1934 the Federal government were to try to regulate crime ridden bootleg liquor distribution. Sorry, Charlie.  Prohibition is over. Too late.

I am not so naïve as to think that there weren’t problems. They were awful, and all those guys, including industry giant Countrywide, had regulatory agencies that flat dropped the ball. One thing you can learn from that is that it is hard for regulators to do their job with large companies. There is simply too much going on, there are too few regulators, and they were all chasing other targets. But it’s easy to beat up on the small guys.

Recently they have really come down hard on what is left of the mortgage brokerage industry. The industry has been reduced by at least 50% and of the 36,000 companies that are, by some counts, still alive, 53% are one-man shops like mine. The other half, generally speaking, still qualify as what would be defined as “small businesses.” From a regulatory standpoint, it is easier to get compliance for a bunch of weak small businesses. The big guys like Wells Fargo, BofA, Chase, and Citicorp all spend, literally, billions of dollars in attempting to influence legislation and keep regulators off their backs. How much can I spend?

In 2010 we got the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act). Doesn’t that sound wonderful? “Safe” and “fair.” Basically what that did was to duplicate the education and licensing responsibilities of the 49 state agencies that licensed mortgage brokers. The 50th state, Alaska, had legislators who felt that their modest 722,000 residents were safe enough. Note that the population of our largest state is about one-fourth of the population of my home area, Orange County. We have 3,000,000 residents crammed into California’s second smallest County. Whatever, the SAFE Act costs me about $700 per year in new fees in addition to the State license fees I must still pay. So my costs go up.

The next was the 2010 introduction of the revised Good Faith Estimate. It generated new forms that no one understands. It also generated Compliance Departments in every lender because they are still responsible for proper disclosure. These departments are usually staffed by a half dozen new people, but they learn enough to tell me I did it wrong. Those lenders pass on their additional costs by raising their fees to consumers.

Appraisals must now be ordered through Appraisal Management Companies who tack on their fees. Appraisals now cost the borrowers from $100 to $150 more although the actual appraiser makes less money than he did before.

Remember the payroll tax cut? It reduced the employee paid portion of Social Security Tax from 6.2% to 4.2%. For someone with an annual income of $50,000 it put an additional $1000 in their take-home pay. Congress was hoping that they would go spend it and help stimulate the economy. How did Congress pay for it?

Congress instructed the Federal Housing Finance Agency that “supervises” Fannie Mae and Freddie Mac to increase their “guarantee” fees or “g-fees” by 10 basis points or one-tenth of a percent. On a nationwide average loan size of $200,000, that adds $200 per year in interest cost to lenders and is passed directly along to consumers. That takes some of the fun out of the $1,000 payroll tax cut.

$200 per borrower doesn’t sound like much but when the total loan volume is close to $1 trillion, this means the total take is $1 billion. What’s more, it doesn’t go to Fannie and Freddie. It is sent directly to the U.S. Treasury. You can call it what you want, but I think that it is a TAX.

The payroll tax cut is now set to expire at the end of this year but the increase in mortgage rates is scheduled to go on for ten years. Now why Congress felt borrowers ought to pay for this payroll tax cut I cannot surmise. I guess it looked too much like a piggy bank to pass up. That’s not all. As Johnny Carson used to say, “BUT WAIT, THERE”S MORE!”

On August 31st FHFA announced ANOTHER 10 basis point increase. That’s another $200 added to the annual cost of a mortgage and another $1 billion to the Treasury. There is not another payroll tax cut so why this increase? Here is the press release.

These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” said Edward J. DeMarco, Acting Director of FHFA.

First, you can see that this action is DIRECTLY THE OPPOSITE of what the Federal Reserve is trying to do, keep rates low. Second, any increase in borrowing costs helps stall the housing recovery. HELLOOOO! Obviously this hasn’t been well thought out.

Third, it presupposes that there is a private capital market standing by on the sidelines just waiting for an opportunity to jump into the mortgage market. THERE IS NO PRIVATE CAPITAL MARKET. Fannie and Freddie and the FHA and VA own some 95% of the domestic mortgage market. The only private loans are those done on Jumbo loans, and those loans are a lot more than one-tenth of one percent higher than Fannie & Freddie’s rates.

The next step in the logical process they are following would be to keep increasing rates until the private capital market were to wake up from its current slumber. That will obviously do wonders for the housing industry!

It’s all BS but all of these moves, Compliance monitoring and appraisal costs and GSE fees have added significantly to the cost of a mortgage. Obviously, all those Washington bureaucrats didn’t think that all these rules designed to “protect” consumers would raise costs like it has. They had no clue and still don’t.

Dodd-Frank hasn’t even been fully implemented yet. In my next newsletter I will discuss the latest idiotic proposal that has been announced by “your protector,” the poorly named Consumer Finance Protection Bureau. You won’t believe it.

Navigate accordingly.

Larry Doyle

ISN’T IT TIME to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter S.

    “That said, it should be no surprise that more regulations do not necessarily mean better regulation.”

    Enforced regulation makes the best regulation.

    • Peter S.

      For me LD, it’s all about financial regulatory enforcement. Had the financial regulation that existed pre 2000 (I will even suggest the financial regulations pre 2008) been pro-actively enforced, this nation would be roaring and not reeling.

      Considering the alternative, …and left to their own devices, once again the big banks, and financial institutions…

      It’s about the greed and gluttony that feeds a soulless beast.

      • LD

        NAILS IT…!!!

  • fred


    I’m more convinced than ever that the only answer for a prosperous American future must come from outside the established political system in this country.

    As I witness the latest attacks by Obama on Romney concerning the non payment of any taxes by 49% of Americans (who will influence the outcome of this election), I am left with the feeling that nothing will change until it has to change and by then it will be too late.

    The Savvy Borrower is just another example of the frustration being felt by small businesses across America. Higher fees, more and less effective regulation and an inept bureacracy charged with enforcement and administration.

    I teach my children self-reliance, to get involved with small and growing businesses and to stay as far away from government as they possibly can. Even this is getting harder and harder to do as government reaches further and further into our daily lives and into our pocketbooks.

    Soon small American businesses will be unable to compete and it will not be a competitor who forces them out of business, it will be our own government! Already weighed down by legacy costs, workers comp and healthcare, small businesses are now being required to spend more and more time focused on compliance costs rather than the jobs generator, revenue growth.

    I have great concern for the structurally and habitually unemployed. Those that haven’t spent a career building their resumes and learning the politics necessary to work or survive in big business or government jobs. To these long term unemployed, historically, small business has been the employer of last resort, helping to provide a transition back into the work force. Small business can no longer shoulder this burden.

    One thing is certain, the business cycle and a slower growth economy ensures the long term structural unemployment problem will continue to escalate reguardless of the reported unemployment rate and reguardless of the political rhetoric coming from Washington.

    There but for the grace of God go I, there but for the grace of God go us all. Soon I’m afraid, the grace of God will not be enough.

  • JPMorgan CEO Jamie Dimon testified at a U.S. Senate Banking Committee hearing in June that the Dodd-Frank law has not solved problems facing Wall Street, but instead has created a confusing new regulatory system for banks. “What we set up is a system with more and more regulators. We don’t actually know who has jurisdiction over many of the issues we are dealing with anymore. I would prefer a simple, clean, strong regulatory system, with real intelligent design, but that’s not what we did.”

    Is Mr. Dimon correct in his assessment?

    • LD


      I do not know that we can simplify the regulatory topic to a few blanket statements. I do believe that a LOT could be accomplished — and was previously missed — because we did not have meaningful regulators doing their job amidst an incestuous culture. I would like to see that culture exposed and turned over in conjunction with appropriate regulations.

      Is Mr. Dimon correct? To a certain extent although I think he would really like to leave the incestuous culture as the status quo. The fact that FINRA’s Rick Ketchum is being talked about to be a likely replacement for Mary Schapiro is an indication to me that the culture is not about to change. That is, if BO is re-elected.

Recent Posts